Adjustable Rate Mortgages At a Glance

Pro	Con
Lower initial interest rates	Lower rate means you potentially assume more risk
If interest rates remain steady or decrease, could be less expensive over time	If interest rates increase, you'll be faced with higher monthly payments in the future

Tip
Before deciding that an ARM is right for you, ask yourself these questions:

• Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
• Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
• How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
• Can my payments increase even if interest rates generally do not increase?

The Basic Features
The Adjustment Period
With most ARMs the adjustment period occurs every one, three or five years, resulting in a change in your interest rate and montly payment.

The Index
Most lenders tie ARM interest rate changes to changes in an index rate. These indexes usually go up and down with the general movement of interest rates, making your monthly payment amount rise or fall accordingly.

The Margin
To determine the interest rate on an ARM, lenders add to the index rate a few percentage points called the margin. The amount of the margin can differ from one lender to another, but it is usually constant over the life of the loan.